That great American philosopher Mike Tyson was once asked about whether it worried him that his opponent was training hard and seem to have developed a fight plan against him. Tyson respond with something to the effect of "Everybody has a plan until they get punched in the face". So true. Once you get knocked back on your heals, everything changes, with your plans often getting scrapped in the process. Traders and investors know the feeling all too well. Even the best made trading plans and analysis can be ignored after the market throws you a curve ball and administers the equivalent of a punch to the face.

All of this came to mind today as I was watching what seemed to be a muted reaction to the Fed decision, and more importantly, a reaction that did not fit well with the plans or expectations of many of the traders I was following on Twitter. When this happens, it is easy to start improvising, but of course, this is were new traders, and even those with experience, start to get into trouble. On such days I always find it useful to remind myself of some common mistakes to avoid, three of which are nicely presented in a new wallstcheatsheet.com article based on interviews with traders Joe Donahue and Joey Fundora (see article). While most mistakes fall into the category of common sense, it is still good to remind ourselves of them from time to time. The three mistake given by Donahue and Fundora, along with some added comments, include the following:

1) Not Selling Fast When You Are Wrong: Here it is important to remember that one of the most important metrics is knowing what you can lose on a given trade or investment. Of course, having an idea what you can make is also important, along with knowing what the risk-reward of the trade or investment is, but knowing when to cut your losses will keep you in the game. The old adage of "let your winners run, but cut your losses quickly" applies here. If you let the winners run, but have tight 8-10% stops on your losses, it is possible to be right less than half the time and still make money since you have kept yourself in the game for those times when your due diligence pays off, and the market finally realizes how smart you are.

2) Using Multiple Approaches or Strategies: This ties in somewhat with the Mike Tyson quote. While it is important to have a trading/investing plan and strategy in mind, you need to remember that every once in a while the market is going to punch you in face. During these times it is important to remember why to got into the trade and try not to stray or trade aimlessly or recklessly, simply chasing. Sometimes the best contingency plan is to simply walk away from the computer and shut your engines down for the day, giving yourself time to evaluate your strategy.

3) Trading Too Large: Trading small, or even paper trading, is always good advice for new traders. Stepping back on the amount of capital at risk is also good for experienced traders who have hit the wall and are not seeing trades and investment opportunities quite as they should. Even baseball players that consistently hit over .300 will lay down a bunt just to help them get out of a slump. Trading is no different - except you often don't get paid when in a slump, making it all the more tempting to swing for the fences. Discipline is key.

A few other common mistakes worth repeating include the following (adapted from here and here):

• Mistake 4.) Committing too much capital per trade
• Mistake 5.) Not effectively using different time frames
• Mistake 6.) Not using technical analysis (using only fundamentals, especially for short-term trading)
• Mistake 7.) Not paying attention to what the market indexes are doing
• Mistake 8.) Not being selective enough, and taking the time to screen for the best opportunities
• Mistake 9.) Not paying attention to volume
• Mistake 10.) Not paying attention to sectors (and industry trends)
• Mistake 11.) Not knowing what to expect from the trade (risk versus reward)
• Mistake 12.) Being greedy and not leaving the party soon enough
• Mistake 13.) Following the crowd too long, or too late in the move (chasing the market)
• Mistake 14.) Immediately reversing the trade once it goes against you
• Mistake 15.) Trying to pick tops and bottoms
• Mistake 16.) Losing your cool and letting your emotions cloud your thinking
• Mistake 17.) Waiting too long to pull the trigger after the analysis is done
• Mistake 18.) Trading too many markets at once
• Mistake 19.) Assuming the news you just read has not already been discounted by the market
• Mistake 20.) Relying on tips or talking heads without doing your own analysis.

I am sure there are many more, some that you think don't apply, and probably even a few other mistakes not mentioned that I continue to make myself. Here is hoping that looking at the list causes you to remember why you have succeeded in the past, and why you continue to be a successful trader / investor - or at least reminds you to walk away or just bunt every now and then.

The Institute for Financial Analysts polled its members and found that they no longer believe in efficient markets, or at least that prices reflect all information (see hedged.biz article). So, is stock investing based on fundamentals a waste of time? After all, information is more prevalent now than every before, and new information (for the most part) is suppose to be shared equally. If prices are not reflecting fundamentals, then surely, efficient market theory is lacking. As a kind of compromise, some will argue that while the markets are efficient, the participants are not, each analyzing the news, information, and data differently. It is felt that this is where some of academia has gone wrong - assuming that all participants interpret new news in the same way (although those in behavior finance might beg-to-differ).

Unfortunately, this view usually creates more confusion given that for many the participants are the market, such that as long as there are human traders, there will be fear, greed, and pricing anomalies. This is why it is often felt that being a fund manager is as much about understanding historical patterns and psychology, as it is about knowing the fundamentals. The irony is that as the flow of information has become more efficient, given the Internet and the 24-hour new cycle, one could speculate that the market may have actually become less efficient. Now freshly armed with new information, you have even more traders and investors trying to figure it all out, each with their own biases, over-reactions, and in some cases, somewhat predictable herd behavior. Such inconsistencies will no doubt keep market participants looking for alpha, all the while allowing fund managers and technical analysts to continue to thumb their noses at those in the ivory tower.

Some leading technical analysts are continuing to be worried about the major indexes potentially falling another 30 percent. Ralph Acampora believes that if the DJIA falls below the low of 7,552.29 it reached on November 20, that it could fall further to 6,000 (see Bloomberg article). John Murphy also believes that the November lows represent "a very, very significant area," since this is near the point where the market began to recover when the bear market ended in 2003. If we are to break these levels, the trend is expected to become very negative. Recent market action has not been encouraging. Louise Yamada expressed similar concern during an appearance on Fast Money late last year, where she also expressed concern that the DJIA could fall to 6,000. She had successfully predicted before the recent sell-off that the Dow could fall to the 8,000 range. Just last month, her website posted the following:

"The overall market picture still looks troubled. Both the S&P 500 and the DJIA have seen each recent rally (and potential bottom evidence) fail at a slightly lower peak. This progression of lower highs is evidence of supply -- price cannot rise to a slightly higher level because supply is being sold into the rally. ...... The recent pattern of sellers entering into each rally is characteristic of a downtrend, i.e., the failure of the rallies to get above the prior peak. In the study of supply and demand, which is the basis of technical analysis, this pattern represents aggressive supply. Contrarily, in a bottoming process or in an uptrend, higher lows are followed by higher highs, representing aggressive demand. .... Now, however, there is a confluence of sectors rolling over together, which is problematic. The majority of stocks are showing topping patterns."

Technicals are never the whole story, but they certainly help you to know where you have been, and how much trouble you may have getting to where you want to go. The data is certainly not encouraging for the bulls.

A recent survey of asset managers, institutions, and high net worth investors at the Global Alternative Management Fund of Funds conference found that 36 percent of those questioned felt that technical analysis-based trading strategies are likely to outperform in 2009 and 2010 (see Reuters article). This tends to mimic a prevalent view in the market that investing based on fundamentals will be difficult going forward. Changing regulations, compressed multiples, and unknown forward earnings are making fundamental investing suspect and difficult at best. Double digit percent moves on very little or no material changes in fundamentals are also causing investors to now pay more attention to volume, price action, patterns, and support / resistance lines in an effort to predict the size and reversals of potential stock moves. Given that technical analysis can often be a self-fulfilling prophesy, the added attention to technical indicators and patterns may actually make it more likely for such signals to be realized, at least in the short-term. As with many technical indicators, there does not always need to be a theoretical mathematical justification, but simply a heuristic and common sense expectation of what each indicator implies and is likely to predict. In the short-term, such a belief may be all the market has and needs. Hedge funds will no doubt exploit this momentum going forward.